Banks earnings leave markets unmoved, Silver shines

Markets trod water in the morning session despite financial stocks generally beating earnings expectations, suggesting that recent strength in tech and bank stocks was already in the price, with the Nasdaq and KBW Banks index up 8% since early June. Silver led commodities again, up 25% in 4 months.

Bottom-line: risk-hold?

TODAY’S MAJOR NEWS

Bank earnings in the price?

Financial stocks generally beat earnings expectations today, but a lackluster market response suggests that much of this ‘news’ was either mostly in the price or not as good as anticipated. JPMorgan and Wells Fargo both benefitted from higher interest rates being paid by borrowers, initially rising after they both reported surging Q2 earnings, but both stocks were flat by lunchtime. BlackRock was down 1.4% after its revenue fell year over year. Citigroup  was down 3.3% on weaker trading profits.

Markets looking ahead to rate cuts

Financial markets have benefitted from a growing belief that we are close to peak interest rates. While Fed fund futures price almost certain 95% odds of another 25-basis-point rate hike later this month, it predicted just 28% odds of an additional rate hike beyond that, rate cuts by the first quarter of next year, with attendant talk of a soft landing for the economy. That’s a little optimistic, until Fed members see greater signs of cooling in the employment sector and easing of upward price pressure for housing.

Shelter costs have been trending lower, but the housing market is heating up again as consumer confidence returns. Housing data shows that roughly 80% of home loans were financed or refinanced at very low rates over the past five years, providing little incentive to move. In fact, the data suggests that 61% of those loans are locked in below 4%, with 23% below 3%.

China’s economy showing mixed signs of improvement

China’s aviation sector is showing signs of improvement, which should prove good for energy consumption. Freight movement via air recovered to 85% of pre-pandemic levels in the first half of this year, while passenger traffic reached 88% and cargo and mail reached 93% of 2019 levels. However, the recovery in international flights has been very slow, remaining at less than a third of 2019 levels. Nonetheless, international flights should see a more significant boost in the third quarter as summer tourism travel kicks in. Domestic tourist sites are seeing 20 – 30% higher tourism numbers than 2019.

News is less optimistic elsewhere, with domestic electricity consumption data continuing to reflect a slowing economy. Social electricity consumption rose just 3.9% in June above last year’s lockdown levels, which was the slowest growth rate in five months. Electricity consumed in industrial production and manufacturing rose just 2.3% from last year’s low levels, while service sector electricity use grew by 10.1% year-on-year. But even there, service sector growth is slowing from the nearly 21% growth seen in May.

Slower export volume to the US and Europe as they decouple from China is a big part of the problem. Germany just released its long-waited China strategy, reflecting desires to focus more on domestic production. Furthermore, China’s microchip imports used in the production of products fell 22.4% in the first half of this year due to US sanctions.

Soft commodity sector buoyant

Tailwinds continue to support the commodity sector as the dollar sinks and the US economy recovers. Soybeans lead the grain and oilseed sector, with their balance sheet showing little to no margin for weather-related production issues this year. Meanwhile, wheat markets are focused on deteriorating conditions of the spring wheat crops in the US Northern Plains, Canadian Prairies, and in Russia due to dry weather. Chicago wheat and corn prices are simply along for the ride.

TODAY’S MAJOR MARKETS

Equity markets

• Markets were becalmed in morning trade, with the Russell 2000 off 1.1% while the Nasdaq and S&P 500 were unchanged
• Global markets followed suite, with the Nikkei 225, DAX and FTSE 100 all close to unchanged
• The VIX, Wall Street’s fear index, is still hovering around its 12-month low at 13.5

Currencies and Bonds

• The dollar index was unchanged against a basket of currencies at 99.9
• Yen/dollar rose 0.5%, with Sterling/dollar and Euro/dollar unchanged
• Bonds saw profit-taking after recent strength, with yields on 2- and 10-year Treasuries falling rising to 4.73% and 3.81% respectively

Commodities

• Crude oil prices were off 1.6% at $76.7 per barrel
• Silver prices continued to rally, up 1.1% to $25.2 per ounce, a 25% rise from the $20 level seen in March
• Gold was flat at $1,963 per ounce
• Grain and oilseed markets were mostly higher, with the broader commodity sector finding some tailwinds behind renewed optimism about the economy and weakness in the US dollar

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com